During the Budget 2021, Finance Minister changed the EPF taxation rules. Effective from 1st April 2021, employees EPF contribution above Rs.2.5 Lakh Taxable.
As of now, whatever interest you earn on the contribution of your EPF and VPF was tax free. However, effective from 1st April 2021, it is not the case.
Interest earned on the contribution over Rs.2.5 lakh a year is taxable for you.
The reasons quoted during the Budget 2021 is as below.
“Instances have come to the notice where some employees are contributing huge amounts to these funds and entire interest accrued/received on such contributions is exempt from tax under clause (11) and clause (12) of section 10 of the Act”
Let us take two example. Assume that your monthly contribution a month is Rs.20,000. This means your yearly contribution is Rs.2,40,000. This is below the Rs.2,50,000 limit. Hence, the interest earned on this contribution is as usual tax free.
However, assume that you are contributing another Rs.10,000 along with a default Rs.20,000 monthly contribution. Then the yearly contribution will be Rs.2,40,000 (default EPF contribution) and Rs.1,20,000 (VPF contribution). So in total, you have contributed Rs.3,60,000, which is above Rs.2,50,000 limit set during this budget.
Hence, the interest earned up to Rs.2,50,000 is tax-free. Interest earned on the remaining Rs.1,10,000 is taxable for you. You have to pay the tax on it as per income tax slab (Refer the latest Income Tax Slab at “Latest Income Tax Slab Rates for FY 2021-22 / AY 2022-23 | Budget 2021 Key Highlights“.
However, as EPF interest is on yearly compounding, from next year whatever the interest you earn on this Rs.1,10,000 is tax-free for you.
Note:- Refer our latest post “Investing more than Rs.2.5 Lakh in EPF is still the BEST strategy!!” before taking into any action on your EPF contribution.
Conclusion:-I think it may be the biggest jolt for those who were enjoying the tax free interest on their EPF and VPF contribution. However, as the subsequent years’ interest on such contribution is tax free, I still feel EPF and VPF are the best option for your debt part of retirement goal.
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Sir I have ppf account and contribute 1.5 lakh in a year and my wife also has ppf account and she also contribute 1.5 lakh in her ppf account ….my son is 4 yrs now ….can I open ppf account on behalf of him…..if yes ….then after crossing 18 years of my son age…wat I have to do…..kindly do needful
Dear Sidharth,
Yes, you can open it. However, once he turns 18 years of age, then he has to update the KYC and can continue as his own account.
Sir,
My question is
This new rule is applicable from 1st April 2021 onwards, suppose PF+VPF=25000/pm=3L/yr. so excess amount is 50k. Now everywhere i can see 50000*8.5%= Rs.4250(the employee to has to pay tax as per his incometax slab, this i understood. But my question is who will deduct, is it employee itself, will deduct as part of Monthly Tax computation or EPFO itself –> if so, in the same year or next consecutive year). Becoz EPF interest for the previous year is announced in the subsequent year and also interest will be credited in 2022-2023 for PF outstanding till Mar 2022.
Dear Sathyaraj,
This is what I pointed as EPFO declares and update interest lately but our IT filing date is on time, how both these departments co-operate we don’t know. There are a lot of procedural lapses behind this new rule.
This was the question that popped in my mind the moment I first read about this new rule in budget
What about the subsequent year’s interest on the excess amount over 2.5L that one deposits in the first year of deposit ?
“However, as EPF interest is on yearly compounding, from next year whatever the interest you earn on this Rs.1,10,000 is tax-free for you.”
This is the only article where I found this answer.
However I feel this is just an interpretation and budget doesn’t clarify on this part. Its possible that a notification will come later when they realise of this loophole.
In the spirit of taxing interest on big chunks of deposits, I think they would create a separate sub-account in EPF where amounts over 2.5L will go to.
Can you please share the exact wording from budget which concludes about paying tax on interest over 2.5L deposited only in the year of deposit and subsequent year’s interest on it being tax free?
Dear Sanjay,
Refer my post “Investing more than Rs.2.5 Lakh in EPF is still the BEST strategy!!“.
Giving details about the accounting system proposed, he said the intention is that GPF and EPF flows into an account above ?2.5 lakh will be directed to a separate sub-account.
Source: https://www.thehindubusinessline.com/economy/policy/no-retro-taxation-on-interest-earned-for-epfgpf-contributions-of-over-25-lakh/article33762741.ece
Dear Sanjay,
Let us wait fro the official notifications rather than IFs and BUTs.
Is this applicable only to EPF and is not considering contributions to PPF right?
What will be the impact to someone with the below investments
EPF(including VPF) – 2 lakhs
PPF – 1.5 lakhs
Dear Venugopal,
PPF is entirely a different product. Don’t compare that with EPF and VPF.
Does 2.5 L include employer contribution as well?
Dear Saravanan,
No, it is only your contribution.
I think in simple terms, it means that on yearly basis, if the contribution to PF/VPF is more than 250,000 in a year, then, the interest earned on over and above 250,000 will be taxed in the year in which interest on such contribution is declared/credited by EPFO. Subsequent year’s interest earned on this “already earned interest part” (which is now merged and is now the opening balance in a person’s PF account) will not be taxed again.
Dear Kamal,
Yes.
Hi,
Going by the logic for which the government made interest from contribution above 2.5 lacs taxable, wouldn’t the same apply to interest earned second year onwards?
I did not find anything which says that interest second year onwards will not be taxable. If that’s the case, VPF is still a better option like you suggested.
Could you please share the source of this information? Appreciate your help
Dear Hitesh,
If you go by the wordings, it is nowhere mentioned that the interest earned on such additional contribution is taxable on yearly basis throughout your employment.
Agreed that it is not specifically mentioned that interest earned on such additional contribution is taxable on yearly basis, but, since such interest earned is merged and becomes a part of the opening balance in your PF account on 1st April, and the interest earned on this opening balance comprises of the old balance plus the interest earned on this additional contribution, and therefore, technically, this part of the interest should be taxable, if that’s the legislative intent behind this amendment. The government needs to clarify on this point.
Pl clarify following
1. Is this limit of 2.5 lakh for fresh contributions only?
2. Is this limit of 2.5 lakh of interest earned on accumulated / fresh pf or only on yearly contributions?
3.What about those Who have stopped contributions and have kept pf in accounts without fresh contributions?
4. What about nterest on PPF/GPF/CPF if fresh contributions are less than 2.5 lakh pa?
Dear Rajinder,
1) Yes.
2) It is on any contribution you do more than Rs.2.5 lakh from 1st April 2021.
3) No Change.
4) Tax-Free
Thanks
Will the interest earned from the accrued existing corpus remain fully tax free, if the employee stops contributing to the EPF account and only the employer is contributing?
Dear Ajay,
Yes, it will be tax free as long as there are contribution. If there are no contributions then such accrued interest is taxable on yearly basis and taxed as per your income tax slab.